Law firm that was victimized by check scam is entitled to coverage for its loss because policy was “ambiguous”

A federal district court has ordered an insurer to cover the loss suffered by a law firm in a check scam, finding that the loss fell within both the policy’s forgery and alteration endorsement and the policy’s false pretenses exclusion and that the policy therefore was ambiguous.

The Case

The Delaware law firm Morris James LLP alleged that it was approached by a foreign company calling itself Esa Corporation Group Oyj for assistance with collecting a debt allegedly owed by a Delaware entity, B & B Industries, under a sales agreement. Esa signed an engagement letter with the firm and also provided the firm with a copy of the purported sales agreement regarding the products sold and the outstanding debt.

According to the law firm, Esa informed the firm that B & B had agreed to a settlement of the debt to avoid litigation. Three days later, the firm alleged, Esa notified it that B & B had made a partial payment toward the settlement. The law firm alleged that it then received what appeared to be a cashier’s check drawn on Citibank in the amount of $195,495 (“the purported check”). According to the firm, the purported check included all of the identifying marks of a valid Citibank cashier’s check, including an “Official Check” notation and branch and teller numbers.

The law firm deposited the purported check to its account. According to the firm, of the $195,495, Esa instructed it to keep certain funds as compensation for legal services and to transfer $176,750 to an account in Japan to pay a Japanese company for products sold to Esa. Finding no issues with the purported check, the firm followed Esa’s instructions and authorized a wire transfer of $176,750 to the Japanese account, and the money was released to the holder of the Japanese account.

The purported check subsequently was returned by Citibank to the law firm’s bank as “altered/fictitious” and “counterfeit” and then returned to the law firm by mail. The firm alleged that it attempted to recover its lost funds through various means, but that those attempts had been unsuccessful.

The law firm submitted a property loss notice to its insurer, Continental Casualty Company, describing the loss as a “fraudulent check scheme” and attaching a letter describing the facts surrounding the loss. The insurer disclaimed coverage, and the law firm filed suit. The parties moved for summary judgment.

The Policy

Section A of the policy provided:

A. COVERAGE

We will pay for direct physical loss of or damage to Covered Property at the premises described in the Declarations caused by or resulting from a Covered Cause of Loss.

1. Covered Property

Covered Property includes ... Business Personal Property as described under b. below....

....

b. Business Personal Property located in or on the buildings at the described premises or in the open (or in a vehicle) within 1,000 feet of the described premises, including:

....

(6) Your “money and securities”

....

5. Additional Coverages

Additional coverages may be attached to this Policy (designation would appear in the attached form(s)). Unless otherwise stated, payments made under these Additional Coverages are in addition to the applicable Limits of Insurance.

Pursuant to paragraph A.5, the Policy included additional coverages in the form of attached endorsements. One endorsement, entitled “FORGERY AND ALTERATION,” provided:

1. We will pay for loss resulting directly from “forgery” or alteration of checks, drafts, promissory notes, or similar written promises, orders or directions to pay a sum certain in money that are made or drawn by one acting as an agent or purported to have been so made or drawn.

The forgery and alteration endorsement had a limit of $250,000 in addition to the applicable limits of coverage provided elsewhere by the policy.

The policy also stated, in Paragraph A.3, that the covered causes of loss were risks of direct physical loss unless a loss was, among other things, excluded in section B. EXCLUSIONS.

The policy had an exclusion under Section B for losses caused by false pretenses, which provided:

2. We will not pay for loss or damage caused by or resulting from any of the following:

....

j. False Pretense

Voluntary parting with any property by you or anyone else to whom you have entrusted the property if induced to do so by any fraudulent scheme, trick, device or false pretense.

The Court’s Decision

In its decision, the court focused on the policy’s forgery and alteration endorsement and on the policy’s false pretenses exclusion. It found that, although the terms of the endorsement and exclusion were “clear and unambiguous,” the policy was “ambiguous” when they were read together.

The court explained that the forgery and alteration endorsement covered (1) losses resulting directly from (2) the forgery or alteration of (3) “checks, drafts, promissory notes, or similar written promises, orders or directions” (4) to pay a sum certain (5) that were “made or drawn by one acting as an agent or purported to have been so made or drawn.” It then held that the law firm’s loss “was the result of a forged instrument within the clear and unambiguous meaning” of the forgery and alteration endorsement.

The court also ruled that, in addition to resulting from a forged instrument, the scam was a fraud that induced the law firm to voluntarily part with $176,750, within the language of the false pretenses exclusion.

The court then reasoned that because the law firm’s loss was the result of both a forged instrument and a voluntary parting induced by fraud—two contributory causes—it fell within the plain meaning of both the forgery and alteration endorsement and the false pretense exclusion.

In the opinion of the court, in the context of the forgery and alteration endorsement and the false pretenses exclusion being read in tandem, the policy was ambiguous and should be interpreted in favor of the insured law firm. It therefore denied the insurer’s motion for summary judgment and granted the law firm’s motion for summary judgment, ordering that the insurer provide coverage for the asserted loss in the amount of $176,750, together with pre-judgment and post-judgment interest.

This article is from Summit Business Media’s sister service, FC&S Legal: The Insurance Coverage Law Information Center. FC&S Legalfeatures daily analysis of the most significant insurance coverage law cases from across the country, access to thousands of insurance policies with in-depth, expert-authored interpretation, and much more. For a 14-Day FREE Trial, please visit www.fcandslegal.com.